investment and held for a limited number of years. It is also used in high-risk situations, such as highly leveraged deals that have more of a proportion of debt than usual. The third method is the Excess Earnings Method, used to value any profitable company. The Excess Earnings method "assumes that a business is worth the market value of its tangible assets, plus a premium for 'goodwill' if the earnings are high enough."(Horn, 51)Another area that must be calculated is goodwill. "Goodwill is not an operating cost and cannot be depreciated. It does not provide you with tax relief."(Smorenburg, 114) Since there is no record of the worth of goodwill, it can be fairly difficult to determine an accurate buying price. Usually the seller will set the price based on their knowledge of the company. The set price, however, should be reasonable. Negotiations can be made to produce an agreeable price.The next step is to set a purchase price. "There is no right or wrong way to value a business. Each company has different characteristics. Obviously, the seller will argue that the net asset value method is right because that's what he invested in the business."(Tuller, 103) You should consider all factors in the P/E/ ratios, liquidation value, net asset value, and historic and projected cash flow. After analyzing these aspects of the business, you should be able to determine a fair price for the entity."The letter of intent is a document that aims to formalize the terms around which a later negotiation will revolve. As such, the letter is primarily a tentative offer that remains subject to further negotiations and confirmation of material facts through a process of due diligence.By offering a letter of intent, you tangibly solidify your resolve and thereby make the seller understand that you are a serious buyer."(Smorenburg, 126)The letter of intent covers the precise terms of the deal, the payment details, and management and other iss...
